Fidelity International is expanding its smart beta ETF range with two new quality income-focused funds, providing exposure to high quality companies with attractive dividend yields within the European and emerging markets universes.
Fidelity’s Europe-listed smart beta ETF suite will consist of global, US, Europe and emerging markets exposures.
The Fidelity Europe Quality Income UCITS ETF (FEQD) and the Fidelity Emerging Markets Quality Income UCITS ETF (FEMI) provides exposure to stocks which have historically demonstrated good profitability, strong cash-flows, and consistent dividends with the objective of delivering a yield in excess of the broader market while concurrently managing risk.
Nick King, head of ETFs at Fidelity International, commented: “Smart beta strategies are growing in popularity as clients seek systematic exposure to an investment strategy or theme. By combining Fidelity’s active investment expertise with the systematic aspects of passive investing, we believe we can offer a truly differentiated product aligned to client outcomes, such as income.”
The two new funds will track Fidelity-branded indices consistent with the firm’s existing Quality Income ETFs, the Fidelity US Quality Income UCITS ETF and Fidelity Global Quality Income UCITS ETF, which launched in April this year.
FEQD will track the Fidelity Europe Quality Income Index and will feature a total expense ratio (TER) of 0.30%. Based on a starting universe which includes a wide range of the largest Europe-listed stocks based on float-adjusted market capitalization, the methodology initially excludes any security with no dividend yield, an excessively high payout ratio, or negative five-year dividend growth. Constituents are then evaluated according to quality factors with each security receiving a composite score based on an equal-weighted combination of their z-scores across three factors (cash flow margin, return on invested capital and free cash flow stability). The bottom half of the ranked securities are subsequently excluded.
Remaining constituents are assigned a size-adjusted dividend composite score by multiplying their trailing 12-month dividend yield by company size. The highest ranked stocks are selected for final inclusion with the methodology allowing for country, sector, and stock diversification by employing a sector/size-adjusted market cap weighting scheme.
The index is up 9.7% year-to-date (YTD).
FEMI will track the Fidelity Emerging Markets Quality Income Index which follows a similar methodology to FEQD’s underlying index but uses a starting universe of the largest stocks listed across emerging markets. The index is up an impressive 21.2% YTD.
The fund comes in a bit pricier than FEQD with a TER of 0.50%.
The ETFs will commence trading on 1 November on the London Stock Exchange and Deutsche Börse.
Following this launch, Fidelity will also introduce new GBP, USD and EUR currency hedged share classes for the existing Fidelity US Quality Income UCITS ETF, Fidelity Global Quality Income UCITS ETF and the new Fidelity Europe Quality Income UCITS ETF.
King added: “After the successful launch of our first smart beta funds in April, I’m pleased we can now offer a full range of Income ETFs including currency hedged share classes to allow clients to accurately implement their regional views. We plan to offer our next product range in the coming months as we look to grow our ETF capabilities.”